BAE flies high on improved cash-flow forecast

STOP PRESS: BAE Systems, the giant defence contractor once known as British Aerospace, is going to generate £1bn more cash in 2004 than it had led the market to believe as recently as February.

STOP PRESS: BAE Systems, the giant defence contractor once known as British Aerospace, is going to generate £1bn more cash in 2004 than it had led the market to believe as recently as February.

This was the breathless conclusion of Colin Crook of UBS, the most highly respected analyst of the aerospace industry, after he met
BAE's management. It was a nugget of news too big and too important to wait for the ponderous process of publishing a full investment note on the company, so it was rushed out to Mr Crook's clients yesterday. He wrote: "A combination of higher oil-related cash flows, lower Airbus customer financing and a better pre-payment flow will all contribute to this performance."

BAE has been holding its dividend at 2002 levels because profits have been poor since the economic downturn and attacks on 11 September 2001 sent the civil aviation industry into turmoil, and there have been a string of high-profile disputes with the British Government, its main customer on the defence side. Better cash flows, though, will be the key to restarting dividend increases in 2005 or - some bulls were suggesting yesterday - perhaps even later this year.

Investors are also hoping that BAE will have news soon on orders for new Eurofighter Typhoon aircraft, while they have also been cheered by an upbeat statement earlier in the week that the company will develop a new computer for Boeing's Chinook helicopter. To cap it all, the Farnborough Air Show next month is set to be an upbeat affair this year, celebrating stirrings of a rebound in the aerospace industry.

In very heavy trading, BAE shares were up 8.5p, more than 4 per cent, to 218.75p, making them the best performer in the FTSE 100.

The blue chip index closed in the red, never fully recovering from the disappointment of Wall Street's overnight slide. However, with the Dow Jones Industrial Average some 60 points to the good when London closed, thanks to strong consumer confidence numbers, the
FTSE 100 ended just 6.3 lower at 4,512.4.

Despite those confidence figures, there were fears over the health of the US consumer economy, and in particular the outlook for the mortgage market given soon-to-be-rising interest rates. Washington Mutual a mortgage bank from the same region as Royal Bank of Scotland's US businesses, issued a profits warning overnight, citing higher rates, and
RBS shares ended down 17p to 1,617p. Meanwhile, the cooling UK housing market, as suggested by the latest Nationwide figures, sent
HBOS, the owner of the UK's biggest mortgage lender the Halifax, down 11p to 690p.

Man Group, the hedge fund manager, ended as the worst blue-chip performer, down 41p at 1,459p as investors sweated over the financial stability of the industry. Most hedge funds take on a lot of debt, and the worry is that returns could fall substantially as a result of higher interest rates. The doomsters even predict some funds will fail, and the structure of the industry - where a lot of the investment trickles down through "funds of funds" such as those operated by Man - is such that one significant failure could create difficulties for many more. Man says these fears are overdone but, what with its main funds losing money over recent months, investors are not backing the company at the moment. Its shares peaked at 1,856p back in April.

Mining stocks were also out of favour, after figures showed rising stockpiles of copper. These suggested the deficit of supply compared to demand may be easing and sent metals prices lower.
Anglo American came off worst, its shares down 19p at 1,138p.
Antofagasta was 14p lower at 951.5p, and
Rio Tinto dipped 15p to 1,321p.

LogicaCMG fell 4.75p to 180p on talk of poor trading at its German business and disappointing take-up of its new generation of mobile phone network software.

Investors were supping on pubs and brewers shares after a little tiddler from the sector,
Pubs 'n' Bars, reminded the market that Euro 2004 and the nice weather has brought people out for a drink. Pubs 'n' Bars itself was up a penny at 43p, but there were bigger gains for the biggest landlords:
Enterprise Inns was 15.5p better at 580p and
Mitchells & Butlers was up 8p to a record 279.5p.
Greene King, the Bury St Edmunds brewer, was 22.5p frothier at 970.5p while
Belhaven of Scotland rose 4p to 475.5p on chatter that recent sales have been 14 per cent ahead of budget.

There was a boardroom coup at
Zytronic, the touch screen technology group. John Kenmair is taking over as chief executive after complaining that Ian Lawson, the previous incumbent, is standing in the way of efficiency improvements. Rather than looking ahead to the improved profitability promised by Mr Kenmair, investors reckoned that the board were prompted to make the reshuffle after seeing some poor internal figures. Zytronic shares fell 3p to 53.5p.